Institute for Public Finance Reform

Autonomous Non-Commercial Organization

Volume 19: Foreign Experience of Intergovernmental Fiscal Innovations

The book includes some papers of Russian and foreign experts in the field of public finance management at the subnational level. The articles present best practices in fiscal decentralization, distribution of intergovernmental transfers, public expenditure assignment, financing of sub-national government investments and local financial management in different countries.

Authors of the articles were students of the Summer University Training Course on Intergovernmental Fiscal Relations and Local Financial Management organized by the Central European University (CEU) in Budapest, Hungary (2008).

ISSN 1991-05-09

Contents

The article provides an overview over four of the major topics of fiscal decentralisation, and their manifestation in the context of Switzerland. These are the legal framework; expenditure and tax assignment; and intergovernmental transfers. The nature of the Swiss Confederation is such that all the three layers of government — federal, cantonal, municipal — enjoy a considerable degree of autonomy, also and especially in fiscal matters. The article describes how the small-scale nature of Swiss governance has become, over time, also a rationale in favour of more centralism; but horizontal mechanisms are still preferred. Particular for Switzerland is the direct influence of the people on fiscal decentralisation on all the three levels of the Swiss polity. Thus, tax competition in Switzerland can be said to result from a maximum of sub-national financial autonomy. On the other hand, extensive redistribution schemes had to be elaborated to compensate for fiscal inequalities caused by the very diverse nature of the Swiss Confederation as such.

Public Expenditure Assignment in China: Problems and Reform ProposalsAnnotation

This paper, like a medical certificate, is intended to discover the major problems in public expenditure assignment in China and analyze the symptoms by reference to the principles commonly accepted by scholars and bring forth reform proposals. After brief introductory statement in Part I of current challenges for China’s public expenditure, Part II will summarize the thorns in the bush of China’s public expenditure in terms of inter-governmental fiscal relations. Later, Part III will try to illustrate the vicious consequences as a result of the mentioned problems in public expenditure assignment and, finally, Part IV will put forward reformation proposals for fundamental roadmap to a sound and reasonable public expenditure assignment in China. In Part V, conclusive remarks will be given.

Fiscal Decentralization and Local Financial Management in AlbaniaAnnotation

This paper describes the current reforms for political and fiscal decentralization focusing on the relations among different levels of government with regard to public services provision. The paper portrays the nature of intergovernmental fiscal transfers in Albania and argues that although in the last decade positive steps are taken with respect to increasing of local financial autonomy, local units still need to be less dependent on governmental transfers and to play a proactive role on financial capital investment projects. The ill-defined and unfunctional role of regional governments as second tiers of local governments is analyzed and criticized in the framework of regional development and the prospect of attracting EU structural funds. The conclusion emphasizes the use of special purpose entities for the provision and the management of public services requiring economies of scale. The necessity for future study on the effect of fiscal decentralization on local democracy in Albania is presented.

Financing of the Sub-National Government Investments in the Republic of Croatia Annotation

Sub-national governments in Croatia are important factor of investment activity in the country. They induce more than quarter of the amount of total investments of the public sector. However, that is not appreciated because local public sector is heavily restricted in terms of their financial support and autonomy. Croatia is one of the most centralized European countries. Such circumstances result in numerous negative effects. Due to regulative restrictions local units cannot use appropriate instruments for financing investments. That leads to inefficient financing and high costs of capital. In addition, regulation is focused on formal criteria instead of respecting the economic principles through the proper capital budgeting, planning and analysis. Paper offers some proposals.

Financing Bulgarian Local Governments Through Taxes and User Charges Annotation

Bulgaria joined the European Charter of Local Self-Government in 1995 and fiscal decentralization appears as a topic on the agenda of reforms in 1996. Real start was given as late as in 2002, when the Government adopted a Concept for Fiscal Decentralization and an Implementing Program. Numerous amendments in the law were realized and numerous issues were solved. Municipalities were released from payments for social benefits and healthcare; their services were divided in two groups - services mandated and paid by the state (healthcare, education, cultural and social welfare activities) and local services paid by municipalities (transport, garbage disposal, landscaping, roads, street lighting etc.). Local governments assume to determine the size of municipal user charges and from 2006 the collection of local taxes and charges. From 2008 municipal councils are empowered to set the rates of local taxes in the range given by law. Along with the undeniable success on the way to fiscal decentralization many unsolved problems remained - the financial sources of Bulgarian municipalities (mainly local taxes and user charges) are still too weak, allocation of subsidies for capital investments is still non-transparent, etc. Under the new powers at the end of 2008 local governments in Bulgaria exercised strong pressure over parliament to increase the tax rate range while the services provided by them were not improved.

Municipal Budgets in the Czech Republic: Accuracy, Transparency and AccountabilityAnnotation

Municipalities in the Czech Republic exercise a budgetary process similar to those in western democracies. Annual budget is approved by fully independent municipal council and municipal management is performed by municipal officials. Comparison of approved and actual municipal budgets showed sizable inaccuracies in the Czech municipal budgets. Between 1997 and 2007 the budgeted revenues were on average 25 % lower than the actual and the expenditures 15 % lower, the inaccuracies tend to be higher in smaller municipalities. This leads to moral hazard of local officials who expect that some additional revenues above the approved budget arrive during the year. As only 75 % of the revenues and 85 % of the expenditures are approved through the standard budgetary process there is a space for decreasing transparency and accountability, i.e., citizens have less information about budget amendments than about the regular budgets and they cannot participate in the debate preceding approval of budget amendments. These consequences could be partially improved by improvement of revenue estimates through usage of new revenue forecasting techniques, obligation to publish in regular and consistent manner all the approved budget amendments and introduction of a regular approval of the amended budget.

The article illustrates the main structural features and development perspectives of local self-government system of Armenia. As a new established system, which operated since 1996, it faced to new challenges in one hand, and new reform approaches in the other hand. The problems existing in the field of subnational level are several tips: delivery of functions, intergovernmental relations, financial equalization, and etc. The mentioned problems are mainly result of both: insufficient legislation and unestablished civil society. For the solving these problems it is necessary to realize combined measures including following: to advance the degree of decentralization, to invest new approaches and mechanisms of financial equalization and local tax collection, to pay a significant attention to the retraining of municipal servants.

Federal Support of Institutional Changes in Budgetary Sector in Russian Regions and MunicipalitiesAnnotation

The article examines subsidies for subfederal fiscal reform which are one of the intergovernmental transfers in Russia. These transfers have distributed by the federal government to regions and large municipalities on a competition base since 2001. Some dozens of regions and cities, realized their own fiscal reform programs, have taken part in the process of reforming subnational public finance and received these block grants. As a result, subfederal authorities have increased an efficiency of state management, institutional base and quality of public services.